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© Oliver Wyman MRO ASIA 2018 Brian Prentice Partner NOVEMBER 6, 2018
© Oliver Wyman
MRO ASIA 2018
Brian PrenticePartner
NOVEMBER 6, 2018
© Oliver Wyman
OUR CLIENTS
We have worked with many of the industry’s Fortune 500 companies, including• All major US airlines• Leading airlines, MROs,
OEMs, and independent parts manufacturers in the Americas, Europe, and Asia
• Dominant aerospace and defense firms
OUR EXPERIENCE
• ~250 professionals across Europe and North America
• Deep aviation knowledge and capabilities allow the practice to deliver data-driven solutions and provide strategic, operational, and organizational advice
• Increased technical aviation expertise in Europe from 2017 acquisition of UK-based AVISA Aviation Safety Systems
OUR APPROACH
Data-driven: unbiased benchmarking and forecasting tools to establish problems and identify solutionsInnovative: ideas that areforward-thinkingActionable: results-oriented recommendationsCollaborative: an emphasis on working with our clients, alongside executives, management, and support teams
Oliver Wyman’s Aviation, Aerospace & Defense practice is the largest and most capable consulting team dedicated to the industry
© Oliver Wyman
This presentation incorporates Oliver Wyman’s 2018–2028 Global Fleet and MRO Market Forecast and 2018 MRO Survey, both of which are available at oliverwyman.com
Industry Overview 1
© Oliver Wyman
Asian operators continue to trend with global profitability through 2018
Global Commercial Air Transport Industry Net ProfitBy year/US$ BN
Peak
-$30
-$10
$10
$30
$50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018F
Rest of WorldAsia
Continued growth in revenue from ancillaries and lower fuel costs are helping global operators offset the impact of shifting economics
Source: Source: IATA
© Oliver Wyman
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
As oil prices rebound, operators will face new cost pressures, particularly with the older generation widebody aircraft
Crude Oil and Jet Fuel Spot Prices per GallonBy year/US$ BN
Cone of UncertaintyBrent Crude WTI Crude Jet Fuel
Source: U.S. Energy Information Administration, Oliver Wyman Analysis
New gen widebody aircraft are more profitable than current gen
New gen narrowbody aircraft are more profitable than current gen
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
© Oliver Wyman
Over the past year, status changes to 3,613 aircraft have lead the global in-service fleet to experience a net growth of 939 aircraft, representing a 3.7% annual growth rateYear Over Year Changes to the Global Commercial Air Transport In-Service FleetBy Transaction Type
2018 Global Commercial Air Transport MRO Market ForecastBy MRO Segment
$12.8 BNLine
$12.9 BNComponent
$19.0 BNAirframe & Modifications
$32.7 BNEngineTransferred to a
commercial operator3
Completed freighterconversion
30
Unknown prior exclusion6
Removed from storage608
New aircraft delivery1,629
Storage for conversioninto a freighter
(8)
Transferred to anon-commercial operator
(15)
Involved in an accident(16)
Formally retired(113)
Sent to storage(1,185)
2,276Aircraft Additions(1,337)
Aircraft Removals25,3682017 In-Service
Fleet
26,3072018 In-Service
Fleet
3.7%
Translating the changing fleet dynamics into MRO, the 2018 market is forecast to be $77.4 BN, with engine MRO continuing to be the driver of growth
© Oliver Wyman
21,00023,00025,00027,00029,00031,00033,00035,00037,00039,00041,000
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
21,00023,00025,00027,00029,00031,00033,00035,00037,00039,00041,000
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
21,00023,00025,00027,00029,00031,00033,00035,00037,00039,00041,000
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Though the global fleet & MRO market are expected to increase by nearly 50% by 2028, increasing costs (e.g., oil prices) and external market factors (e.g., interest rates) create considerable uncertainty for realized growthGlobal Commercial Air Transport Fleet ForecastBy year/number of aircraft
Global Commercial Air Transport MRO Market ForecastBy year/US$ BN
21,000
23,000
25,000
27,000
29,000
31,000
33,000
35,000
37,000
39,000
41,00020
1120
1220
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
28
50
60
70
80
90
100
110
120
130
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
50
60
70
80
90
100
110
120
130
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
$50
$60
$70
$80
$90
$100
$110
$120
$130
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
$50
$60
$70
$80
$90
$100
$110
$120
$130
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Best/Worst Case Alternate ScenariosLikely Case Alternate Scenarios Historical Fleet Forecast Fleet
37,978
26,307
$114.7
$77.4
Increased global tariffs could drive the forecasts to the lower bounds and shave several years of growth off the industry’s potential
© Oliver Wyman
The global fleet is forecast at an annual growth rate of 3.7%, while the MRO market is forecast to grow at an annual rate of 4.5%
Global Commercial Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
Global Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
Next gen narrow body aircraft will dominate the global fleet growth, while expensive engine shop visits associated with more fuel efficient technologies will drive the growth in the MRO market
26,307
32,32137,978
5.9%
4.1%
-0.6%-0.3%
4.5%
2.8%
-1.2%
-0.6%
5.2%
3.4%-0.9%-0.5%
4.2%3.3%
3.7%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2018 18–'23CAGR
2023 23–'28CAGR
2028 18–'28CAGR
$77
$92
$115
2.4%
3.3%
4.8%
4.3%
1.9%
6.5%
4.2%
3.2%
2.1%
4.9%
4.5%
3.8%3.5%
4.5%4.0%
$0$10$20$30$40$50$60$70$80$90
$100$110$120$130
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
EngineAirframe and Mods Component LineWide-bodyNarrow-body Regional Jet Turbo-prop
© Oliver Wyman
Asia is forecast to experience average growth of 6.5%, reaching a fleet size close to 15,000 aircraft by 2028
Asia Commercial Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
Asia Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
Asia excluding China and India (APAC) is expected to grow at a strong 4% in both fleet and MRO spend over the next ten years
7,825
11,339
14,751
5.0%
10.4%
11.7%
3.5%
7.2%
5.8%
4.3%
8.8%
8.7%
7.7%
5.4%
6.5%
0
5,000
10,000
15,000
20,000
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
$22
$31
$42
5.3%
10.5%
5.9%
2.8%
10.7%
5.4%
4.1%
10.6%
5.6%
7.0%
6.0%
6.5%
$0
$10
$20
$30
$40
$50
$60
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
ChinaAPAC IndiaChinaAPAC India
© Oliver Wyman
Asia Pacific is forecast to experience average growth of 4.3%, reaching a fleet size close to 6,500 aircraft by 2028
APAC Commercial Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
APAC Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
APAC MRO spend is expected to accelerate over the first five years before slowing to 2.8% over the second half of the forecast period, bringing the average annual growth to 4.1%
4,268
5,4526,486
7.1%
3.0%
0.5%
3.6%
5.0%
1.8%
2.8%
1.1%
6.0%
2.4%
1.6%
2.3%5.0%3.5%
4.3%
0
2,000
4,000
6,000
8,000
10,000
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
$14
$18
$21
5.3%
5.0%
6.6%
4.8%
0.7%
3.3%
3.7%
3.4%
3.0%
4.2%
5.1%
4.1%
5.3%
2.8%
4.1%
$0
$5
$10
$15
$20
$25
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
EngineAirframe and Mods Component LineWide-bodyNarrow-body Regional Jet Turbo-prop
© Oliver Wyman
China is forecast to experience average growth of 8.8%, reaching a fleet size over 7,000 aircraft by 2028
China Commercial Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
China Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
China MRO spend is expected to grow double digits over the course of the forecast period, as the in-service fleet growth will drive the need for continuous maintenance spend
3,046
5,000
7,090
10.8%
6.5%12.6%100%
7.3%
6.2%
6.8%36.4%
9.0%
6.4%
9.7%100%
10.4%
7.2%
8.8%
0
2,000
4,000
6,000
8,000
10,000
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
$7
$11
$18
9.6%10.2%12.9%9.9%
5.5%
16.9%
8.8%
7.3%
7.5%
13.5%
10.8%
8.6%
10.5%
10.7%
10.6%
$0
$5
$10
$15
$20
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
EngineAirframe and Mods Component LineWide-bodyNarrow-body Regional Jet Turbo-prop
© Oliver Wyman
India is forecast to experience average growth of 8.7%, reaching a fleet size close to 1,200 aircraft by 2028
India Commercial Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
India Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
The India in-service fleet will experience strong growth over the next 5 years, driven by narrowbodyaircraft. India MRO spend will grow gradually over the next 10 years.
511
887
1,175
12.8%6.9%
43.1%5.6%
6.1%
4.5%
3.1%
3.9%
9.4%
5.7%
21.5%
4.8%
11.7%
5.8%
8.7%
0
500
1,000
1,500
2,000
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
$2
$2
$3
3.8%
4.1%
9.5%10.0%
5.4%
4.3%
7.9%
5.2%
4.6%
4.2%
8.7%
7.6%
5.9%
5.4%
5.6%
$0
$1
$2
$3
$4
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
EngineAirframe and Mods Component LineWide-bodyNarrow-body Regional Jet Turbo-prop
Dealing with rising costs 2
© Oliver Wyman
This year’s survey indicates that 75%+ of respondents see OEMs as credible in their ambitions and expect them to gain market share over the next three years
Do you think OEMs’ growth targets for their aftermarket business units are achievable within the next decade?
Compared to the market growth, OEMs’ share of the aftermarket over the next 3 years will…
Distribution of total responses Distribution of total responses
Yes
No, but they will come close
12%
No, they will miss their goal by a
wide margin
63%
24%
40%
5%
Increase significantlymore rapidly
Increase slightlymore rapidly
Increase about the same 7%
10%Increase slightly less rapidly
Increase significantlyless rapidly
38%
© Oliver Wyman
Almost all respondents report experiencing increasing material costs; not surprisingly, MROs and operators overwhelmingly attribute their material cost increases to OEM actions Have you experienced an increase in material costs?
Main drivers of material cost increases (for yes responses)
Distribution of responses Weighted average of rankings(highest to lowest ranking, scale of 1–5)
2.6
1.7
1.5
1.2
0.2
Lack of availability of USM
Annual OEM material price increases
OEMs restricting the direct sale of
OEM designed partsNext generation
aircraft
Other
Supply chain failures/issues
3.8OEM
Actions
97%
3%
Yes No
© Oliver Wyman
Though respondents have no single strategy to combat rising costs, many non-OEM respondents have included leveraging partnerships, USM or technology in their strategic plansWhat strategy or strategies have you adopted or are you considering to combat rising material costs?
51%
50%
47%
41%
Implement policy to use own USM rather than purchasing parts when able
Partner with OEM to secure discounts
Leverage data analytics, aircraft health monitoring and predictive maintenance to reduce material usage
Increase overall usage of USM parts from any source
Implement policy to use alternative parts rather thanpurchasing OEM parts when able
60%
% of respondents who selected each response (for top 5 strategies only)
© Oliver Wyman
An increase in USM from a small base is expected; however, lack of supply and lack of a clear sourcing strategy are big inhibitors
How will your USM change over the next 5 years?
Is your use of USM inhibited? Main factors inhibiting use of USM
Distribution of total responses Distribution of total responses Weighted average of rankings (highest to lowest ranking, scale of 1–3) (amongst yes responses)
47%
22%
1%Decrease slightly
Increase rapidly
Increase slightly
29%
Remain the same
Decrease rapidly 0%
85%
15%
Yes No
1.1
0.8
0.4
1.5
Other
Lessors/financiers
Lack of availability
Material sourcing strategy
© Oliver Wyman
Wages in Asia remain competitive relative to W. Europe, but the gap is narrowing
1. Average estimate of current prevailing technician billed airframe rates for heavy airframe maintenance by region (in US$)
$44$46
$70
$53
$54
$43
$47
$50
$55
$50
Cybersecurity3
© Oliver Wyman
Every day and across every facet of life, hackers are increasingly bolstering capabilities to launch cyberattacks and disrupt industries
Nature of cyber threats has evolved drastically over just
the past decade
Experts place the number of expert, professional
hackers at over 300,000 globally
Hackers use a variety of means to achieve a number of ends
Global counter-hacking efforts and actual damagesare estimated at half a trillion US$ annually – a sum that has been increasing every year
© Oliver Wyman
67% of respondents indicate they believe that their companies are prepared, yet less than half had conducted a review of cybersecurity risk in operations and maintenance in 2017
Is your company well prepared to handle cybersecurity threats related to operations and maintenance?
Has your company conducted a review of your cybersecurity risk in operations and maintenance in 2017?
67%
33%
47%
19%
34%
Yes No Unknown
The MRO industry has not yet had a major Target or Equifax level cyber-attack –are we next?
© Oliver Wyman
While the majority of companies show an appropriately elevated level of concern, the survey also reveals considerable variability in levels of preparedness, which creates the potential for weak links in the supply chain
Which cybersecurity safeguards has your company implemented?% of total respondents who selected each response for each segment
Overall cybersecurity strategy for the company
Unknown
Active monitoring of cybersecurity intelligence
Employee cybersecurity training program
30%
Cybersecurity threat assessment
Cybersecurity hardening of communication networks
45%
28%
68%
24%
64%50%
56%
90%52%
49%
62%55%50%
30%
39%9%
35%
50%
16%
41%
10%
45%41%
Security standards for third party vendors
59%41%
28%41%
40%
48%5%
3% 8%
50%
MROsOverall OEMs Operators Other
© Oliver Wyman
To achieve a comprehensive, unified cybersecurity and risk management approach for the industry, MRO providers should consider a comprehensive approach
1 Evaluate current state cyber security programs to identify areas of improvement
2 Develop a clear framework for mitigating and managing cyber risks
3 Fortify information technology systems and create a security-minded culture across companies
4 Build and enhance a security minded culture and be fully prepared for when a major cyber incident happens
While no solution is guaranteed to avert all attacks, developing a shared, holistic approach to cybersecurity risk management may give companies a huge advantage
Conclusions4
© Oliver Wyman
Conclusions
The global MRO business is currently valued at $77 BN and is anticipated to reach $115 BN by 2028
OEMs are expected to continue their push into MRO services and anticipated to hit or come close to meeting their growth ambitions
• At the same time, MROs continue to battle higher material and labor costs‒ There are no easy answers
– MROs will need to use a number of countermeasures to become more efficient
• Further complicating matters, cyber threats are mounting and causing increasing disruption across industries‒ The MRO industry has
significant work to do to ensure they are well-prepared to mitigate and manage cyber risks
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